Australia | Dec 10 2008
By Andrew Nelson
The doom and gloom surrounding the global economy and worsening conditions in Australia is about all we “smart guys” have been talking about over the last few months. That is what makes today’s Westpac-Melbourne Institute Index of Consumer Sentiment result so surprising. The read increased by 7.5% to 92 in December, up from 85.5 in November.
The Index is now up 12.1% over the last 2 months and up 16.4% from its low point earlier in 2008 and 3.3% above the average reading for 2008.
Westpac Chief Economist Bill Evans was certainly taken by surprise. While Evans notes the announcement of a further 1% cut in the Reserve Bank’s cash rate, an 18.4% fall in petrol prices and a share market rally in recent weeks would have lent some support to the read, he was still not expecting the consumer sentiment index to post such a significant jump.
He explains that last month consumers were responding to a cumulative 1.75% reduction in the RBA’s cash rate, a 12.6% fall in petrol prices, and the announcement of the Commonwealth government’s $10.7bn fiscal stimulus package, but the Consumer Sentiment Index only managed a disappointing rise of only 4.3% in November and it was starting from a much lower base.
The big difference seems now that interest rate cuts are finally starting to get some traction. Evans points out that last month, the confidence of those with a mortgage only increased by 2.9% despite the record rate cuts from the RBA. He expects that consumers would have still be a bit suspicious about the cause of the cut and their bank’s willingness to pass them along. But over the last month, Evans claims that banks have passed on around 2.7% of the 3% in rate cuts over the last 3 months.
The latest result show unequivocally that households have responded, with the confidence of mortgage holders surging by 11% in December compared to just 1.6% for tenants.
And there’s even more good news, as Evans points out that four of the five components in the index increased in this latest read.
The outlook for family finances booked the most significant turnaround, increasing by 4.6% after last month falling by 7.8%. Expectations for finances over the next twelve months improved by 5.3%. Surprisingly, notes Evans, the five-year economic outlook fell by 3.7% although he thinks that has much to due with a 15.7% jump in November.
One of the keys to the improving outlook for family finances can be seen in the 28.2% jump in positive sentiment towards whether now is a good time to buy a major household item. Westpac notes that the surprisingly big jump was cycling off of a 15.8% jump last month. All up, that index is now only 10.9% below its level from a year ago.
Evans thinks that this result in specific sends a welcome message to weary retailers and paints a positive picture for the outcome of the last few weeks of crucial Christmas trading. It also suggests the government’s fiscal stimulus package will mostly be spent, as intended.
More good news came from the “Time to Buy a Dwelling Index” which surged by 39.4% from its September level, which in turn was up 21.2% on the level in June. The gauge is now at its highest level since March 2002, when Evans notes the housing boom was well established in Australia. All in all, the read has Evans expecting that there will now be a revival in the residential construction cycle from the second half of 2009.
Evans expects the RBA will decide to cut rates by a further 0.5% when it meets in February despite cash rates currently at the lows of the last cycle in 2001. In fact, with US rates likely to reach zero and European rates 1%, there is plenty of room for Australia to cut rates to below 3%.
The beleaguered car industry also got an early Christmas present, with the “Time to Buy a Car” index up by 28.8% from the September level.
Investment confidence was unable to join the party, with the impact of the credit crisis still widely visible across most metrics. Households preferring bank deposits has jumped from 20.1% a year ago to 36.9%, as investors increasing look for safety. This is evidenced by a fall in “preferences for shares” to just 8.1% from 14.7% a year ago. Superannuation preferences have fallen from 7.2% to 2.6% and real estate has tumbled to 13.4% from 21.1%. Unsurprisingly, paying down debt has become a major concern, with the numbers jumping from 12.9% to 23%.
Despite the good news, Evans can’t help but point out a bit of doom and gloom. He notes the bank recently lowered its forecast for global growth in 2009 to 1.3% from 2.2% and thinks the global growth and domestic economic outlook are much more concerning than what was seen in 2001.
So while the policy response from both the Commonwealth government and the Reserve Bank is admirable and the response from consumers has been positive, there is still a lot of work to be done, cautions Evans.